Stocks have not been showing a lot of concern for the loss of momentum in the economy as indicated by Thursday’s GDP report. Driving the market’s optimism is this view that the first-quarter slowdown was due to temporary factors that will reverse in the coming quarters.
In fact, ‘transitory’ has emerged as key phrase lately in market discourse, used all over, including by the Fed, to describe everything that is not going our way. The rise in commodity prices, tell-tale signs of inflation, and the first quarter GDP slowdown are all due to ‘transitory’ forces. I am completely on board with this emerging ‘transitory’ narrative. But I must admit that its overuse is making me a little nervous.
The GDP slowdown and reversal in Jobless Claims notwithstanding, stocks have other good reasons to feel cheery. And the biggest of those reasons is the first quarter earnings reports.
With about half of the reports out, earnings have been better than pre-season expectations. Contrary to expectations, growth rates and positive surprises have generally been inline with the preceding quarters. Importantly, concerns about margin squeeze and the impact of Japan have not materialized, at least not yet. It is this strength in corporate profitability, with some support from the ‘transitory’ narrative, that has been helping the stock market momentum.
And we have an excellent example in Caterpillar’s (CAT) results this morning, which highlights the continuing earnings story. The company blew past expectations and guided higher. Caterpillar is a beneficiary of surging demand due to the commodity-price strength, but they are also a consumer of a number of these commodities. And the concern has been that their inability to pass on the rise in input costs would crimp their margins. But we have yet to see that play out in Caterpillar’s results.
Others have not been so lucky in shielding their margins from commodity-price inflation, as we saw with Pilgrim’s Pride (PPC) having weaker than expected results this morning. Among today’s other major earnings reports, we got a solid earnings beats Merck (MRK) and Chevron (CVX).
We had soft results from Microsoft (MSFT) after the close yesterday. Microsoft’s absence from the hot tablet category appears to have started showing up in its results, with sales of the company’s flagship Windows operating system dropping by a greater than expected 4% rate. They beat on revenue and came inline on earnings, but the cannibalization of consumer PCs by tablets is emerging as a major threat for Microsoft.
Earnings will remain the driver for now till we get the April non-farm payroll report next week. I don’t think that the ‘transitory’ narrative will work if we get a negative surprise next Friday.
CATERPILLAR INC (CAT): Free Stock Analysis Report
CHEVRON CORP (CVX): Free Stock Analysis Report
MERCK & CO INC (MRK): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
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